Berenberg backs Berkeley Group despite sluggish London market
By Duncan Ferris
Date: Friday 21 Jun 2019
(Sharecast News) - Analysts at Berenberg hiked their target price of Berkeley Group from 3,280p to 3,480p, complimenting the strength of the property developer's balance sheet and its ability to deliver strong results in a "soggy" sales market, but told clients there were better pickings to be had elsewhere.
In a research note sent to clients, the broker argued that the group's operating model and expertise, focused on longer-term regeneration sites with a bias towards operational risk - as opposed to financial risk - had ensured sector-leading returns over the long-term.
"However, with the London market showing no signs of a rapid recovery, returns will continue to revert to mean, and we think there are better opportunities elsewhere," they cautioned.
While Berkeley's FY 2019 numbers came in 9% ahead of consensus (boosted by the transition to IFRS 15), the analysts cut their estiamte for profits before tax in 2020 by approximately 4%, but boosted expectations for 2021 by 7% as volumes are expected to recover in the latter year, leaving overall forecasts over the two-year period in line with consensus.
Factors such as affordability, tax changes, stamp duty and Brexit have contributed to a slower London sales market so that Berkeley was now transitioning away from a period of super-normal profitability.
Hence, the company's operating margins were mean reverting to approximately 20% in the medium term.
Against that backdrop, the analysts praised management taking steps to de-risk the balance sheet.
"While land opportunities are increasing, management seems unwilling to pull the trigger to any great extent in the current environment. Should the market see a marked correction and distressed sellers emerge, we would expect Berkeley to materially increase its land purchases," the analysts said.
The analysts added that Berkeley's intention to return £280m to shareholders annually until at least 2025, even in the event of an additional £400m investment in working capital during the current year, further demonstrates the strength of the company's balance sheet.
Berkeley Group's shares were up 1.33% at 3,573.00p at 1043 BST.
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